Government pressures RBI on bank licence

Nov 19, 2012, 05.34AM ISTTNN[ Shubham Mukherjee ]

MUMBAI: The finance ministry appears to be fast losing patience with the Reserve Bank of India on the issue of offering new bank licences to private sector players. It has asked RBI to finalize guidelines and initiate the process of inviting applications "without any further delay".

In a letter addressed to RBI deputy governor Anand Sinha , financial services secretary D K Mittal said the government hopes to get the Banking Regulation Bill 2011 passed during the winter session. The letter pointed out that RBI doesn't need to wait till the bill is passed as under certain existing laws the banking regulator has the powers to govern these entities.

"In any case, if RBI issues the final guidelines, the process of granting a licence to a new private sector bank would take six months to a year, and in the meanwhile, the bill would be passed.

Even before the bill is passed, RBI would have adequate powers ... " says the letter. The letter , a copy of which is with TOI, was sent just days before finance minister P Chidambaram asked RBI to issue final guidelines for new bank licences earlier this week.

Along with differences over interest rate cuts, the government and RBI have been at loggerheads over the issue of new bank licences. RBI is seen to be dragging its feet on the issue as the draft guidelines for new bank licences were issued by the central bank on August 29, 2011. RBI had then mentioned that the process of inviting applications for setting up new banks in the private sector would be initiated after amendments in the Banking Regulations Act 1949. Mindful of the delays , the government once again kick-started the process of granting licences in a meeting with the RBI on October 6, 2012. More recently there was a meeting of the secretary, financial services (which governs banking) with the RBI deputy governor on October 15, to address RBI's concerns on the issue.

RBI, during the meetings, had said that three amendments to the Banking Regulation Act 1949 were required to strengthen the regulatory powers of the central bank. It proposed that RBI should be empowered by inserting a new section 12B in the Banking Regulation Act 1949 so that any acquisition of 5% or more of the share capital of a bank would require its approval . Besides, the new act should empower RBI to supersede the board of directors of a banking company and appoint an administrator during the period of supersession .

Further, the new act also proposed to empower RBI to call for information or inspection of any associate enterprise of a banking company.

The government's contention is that "in so far as prior approval of RBI for acquisition of 5% or more of shares of a bank is concerned, currently RBI guidelines for acknowledgement of transfer/allotment of shares in private sector banks, dated February 3, 2004, require that no transfer takes place of any acquisition to a level of 5% or more... unless there is a prior acknowledgement of RBI. Hence that power is already there with RBI," it said.

On the issue of supersession , the letter notes that "in the draft guidelines that promoters or promoter groups will be permitted to set up a new bank only through a wholly owned nonoperative holding company which will hold the bank as well as other financial services companies regulated by RBI or other financial services regulators".

It adds that "Section 36AA and Section 36AB of the Banking Regulation Act 1949 empower RBI to replace members of the board or any officer of a banking company and to appoint additional directors".

On the issue of inspection and supervision powers on the associate enterprise of a banking company, it has proposed in the new bill that RBI will exercise this power jointly with other sector regulators.

"A draft MoU for forging cooperation in the field of supervision of conglomerates has been circulated among the four regulators — RBI, Sebi, IRDA, PFRDA — under the aegis of the Inter Regulatory forum for Financial Conglomerate Supervision (a forum under Financial Stability and Development Council)." The government now proposes to advise Sebi, IRDA and PFRDA to finalize the draft with RBI to sign the MoU through which the issue of joint supervision of associate companies of banks could be sorted out.